WSJ : Coach Owner’s Luxury Tie-Up Can’t Fix Everything

Coach Owner’s Luxury Tie-Up Can’t Fix Everything
Tapestry’s mega deal attempts to imitate European luxury art of scale

In the world of luxury, Europeans have mastered the art of scale far better than the Americans. Coach owner Tapestry is trying to change that with its splashy acquisition of Versace’s owner, but it won’t be easy.

Tapestry, which also owns Kate Spade and Stuart Weitzman, on Thursday said it will buy Capri Holdings, owner of Michael Kors, Versace and Jimmy Choo, for a hefty 59% premium over its 30-day volume-weighted average price ended Wednesday.

The $57-a-share cash purchase pegs Capri’s enterprise value at 9.9 times trailing 12-month earnings before interest, taxes, depreciation and amortization—closer to Tapestry’s own 9.1 times multiple Wednesday. Before the acquisition, Capri was going for a more modest 7.55 times multiple.


Going big makes a lot of sense for luxury brands; deep pockets mean access to prime properties and advertising platforms. Case in point: Companies such as Louis Vuitton owner LVMH and Gucci owner Kering have grown at a much faster pace than smaller peers such as Salvatore Ferragamo and Burberry in the past five years.

Tapestry said it sees opportunities for more than $200 million in synergies over the next three years from reducing operating costs and finding supply-chain efficiencies. Neil Saunders, managing director of research firm GlobalData, pointed out in a note that Tapestry has better marketing and digital platforms, both of which should help grow Capri’s brands. Notably, 88% of Tapestry’s sales are from its own stores and websites, while just 68% of Capri’s business comes from the direct-to-consumer channel.

The acquisition also expands Tapestry’s portfolio to more elevated luxury brands Versace and Jimmy Choo and gives it greater exposure to Europe.

Despite the obvious benefits of scale, though, Tapestry investors aren’t completely sold. Its shares tanked 13% in morning trading after the deal was announced, dragging its enterprise value down to 8.2 times trailing Ebitda—a 20% discount to its five-year average and deepening the valuation gap to European competitors.

There are good reasons for a healthy dose of skepticism. For one, the deal brings the problems of Capri’s Michael Kors brand, which makes up the biggest revenue source but has faced weak demand in recent quarters. The brand’s accessible price positioning makes it particularly vulnerable to pullback from middle- and lower-income consumers. Tapestry’s experience handling a successful turnaround of Coach, which previously suffered from brand dilution after too-frequent promotions, could come in handy here.

Additionally, Tapestry is taking on a hefty $8 billion worth of debt to fund the purchase. Getting to its target leverage ratio of 2.5 times debt to Ebitda could prove to be an uphill battle as demand for luxury—especially in the U.S.—is slowing down.

Crucially, there is one thing that scale won’t be able to bring for Tapestry: Patient capital. European giants such as LVMH, Kering, Hermès and Richemont are all family controlled, which means they tend to be conservative on debt and have the luxury of making decisions that preserve brand cachet—even at the expense of slower near-term growth. By contrast, Tapestry’s executives are subject to the shorter-term whims of shareholders that place more importance on quarterly results.

Going big won’t solve all of Tapestry’s challenges.

WSJ : Atlantic Hurricane Season Prediction Increased to ‘Above Normal,’ NOAA Say

Atlantic Hurricane Season Prediction Increased to ‘Above Normal,’ NOAA Says
Record-warm Atlantic sea surface temperatures could fuel hurricane activity

The National Oceanic and Atmospheric Administration on Thursday increased its forecast for this year’s Atlantic hurricane season to “above normal” from its previous estimate of a “near-normal” season.

This year’s hurricane season, which typically runs from June to the end of November, has been difficult to predict, climate scientists said. The El Niño climate pattern traditionally helps temper the Atlantic hurricane season. This year, that’s counteracted by elevated water temperatures in the Atlantic Ocean that can fuel hurricanes.

“The ongoing El Niño potentially competing with local conditions in the Atlantic increased the uncertainty in the outlook,” said Matthew Rosencrans, the lead hurricane forecaster for NOAA’s Climate Prediction Center.

NOAA said Thursday that it now expects 14 to 21 named storms this year, of which six to 11 will become hurricanes, which have winds of 74 miles an hour or higher. Two to five storms are expected to be major hurricanes, meaning winds above 111 mph.

NOAA’s Climate Prediction Center on Thursday calculated a 60% chance of an above-normal season and a 25% chance of a “near-normal” season.

NOAA forecasters in May predicted a “near-normal” Atlantic hurricane season, with 12 to 17 large storms that get named. An average Atlantic hurricane season produces 14 named storms, of which seven become hurricanes and three are major hurricanes.

The typical impact of El Niño produces an Atlantic hurricane season with only about nine named storms, Rosencrans said, including four hurricanes and two major hurricanes.

This year is different, in large part because of record-warm sea surface temperatures, NOAA said. Warmer water means more moisture in the air, which fuels bigger and stronger hurricanes, according to NOAA.

In June and July, the sea-surface temperatures in the area of the North Atlantic where most major hurricanes form were the warmest since 1950, Rosencrans said.

“Normally El Niño knocks down your storms. Normally the warm Atlantic brings up your storms,” said Phil Klotzbach, a senior research scientist at Colorado State University. “So it’s kind of a big question as to exactly how that’s going to play out.”

The university, which puts out its own hurricane forecast, in early August also predicted an above-average Atlantic hurricane season. It predicted 18 named storms in 2023, including the five named storms that had already formed this year.

In 2022, NOAA recorded 14 storms, including two, Ian and Fiona, that became major hurricanes and left a trail of destruction in their wake.

FT : Tapestry/Capri: road to US luxury brand is not paved with gold

Tapestry/Capri: road to US luxury brand is not paved with gold
Significant debt is being taken on for a group in which sales are mostly generated by struggling Michael Kors

Americans are avid consumers of shiny, expensive things. They make up a huge proportion of global luxury sales. Yet the country has never managed to nurture a luxury fashion conglomerate that can match the prestige of French groups like LVMH, Kering or Hermès. 

Tapestry, the company behind Coach, Kate Spade and Stuart Weitzman, is making a multibillion-dollar bet that it can change that. The New York fashion company is buying Capri Holdings, home to Versace, Jimmy Choo and Michael Kors, for $8.5bn including debt. Tapestry’s management said the “transformational” deal would create a US luxury powerhouse with combined revenues of more than $12bn across more than 75 countries.

The numbers tell a different story. Tapestry is taking on significant debt to acquire a company in which Michael Kors — a struggling and not particularly prestigious brand — generates about 70 per cent of group revenue. Versace, the only true high-end brand in Capri’s portfolio, accounts for just a fifth.

Tapestry’s $57 a share cash offer represents a 55 per cent premium to Capri’s undisturbed three-month average share price. The 40 per cent drop in Capri’s stock this year may make this seem prudent. But Tapestry is paying about seven times ebitda for the business. This is above the six times multiple that its own shares are trading on. Even the $200mn of cost saving synergies being touted, taxed and capitalised, will not cover the premium it is paying.

Critically, the deal also means that Tapestry’s net debt to ebitda ratio will jump to 4.5 times from the current one times, according to Bernstein. It plans to suspend its share buyback to help deleverage the balance sheet. The 13 per cent drop in Tapestry shares illustrates investor displeasure.

Capri offers geographical diversification. But Tapestry does not have a great M&A record. It purchased Kate Spade just before the brand fell out of favour and it has struggled to expand Stuart Weitzman. The dream of a homegrown US luxury empire remains elusive.

FT : Early humans wiped out in Europe by ‘glacial cooling’, study suggests

Early humans wiped out in Europe by ‘glacial cooling’, study suggests
New research challenges idea that people have continuously lived in region since first arriving

Extreme “glacial cooling” that occurred more than a million years ago in southern Europe is likely to have caused an “extinction of early humans” on the continent, according to new research.

The previously unknown ice age pushed the European climate to “beyond what archaic humans could tolerate” and likely wiped out human life on the continent temporarily, concluded an academic paper published in the journal Science.

The findings by 11 researchers from institutions including University College London and the University of Cambridge challenge the long-held idea that humans have continuously occupied Europe since first arriving in the region.

The newly discovered cooling event was “comparable to some of the most severe events of recent ice ages”, said the paper’s lead author Vasiliki Margari from UCL. “We suggest that these extreme conditions led to the depopulation of Europe,” the researchers concluded.

Glacial-interglacial cycles, or warmer and colder periods each lasting thousands of years, have occurred cyclically over the past 2.6mn years, with large ice sheets forming during the colder spells and melting during the warmer periods.

According to the academic paper, a previously unknown glacial period that occurred about 1.1mn years ago led to abrupt cooling that lasted about 4,000 years. This happened as conditions began to warm and large ice sheets melted into the Atlantic Ocean, which pushed down European sea and land temperatures.

The researchers identified the glacial period using an analysis of marine micro-organisms and muddy sediment taken from deep under the ocean’s surface near the coast of Portugal. They then used computer models to assess how suitable the colder environment would have been for early human occupation.

Early humans, who may not have been able to build fires or create sufficiently warm clothing or shelters, would have been “very unlikely to have survived” the extreme cooling, said Chronis Tzedakis, a co-author of the paper from UCL.

Much colder and dryer conditions on land would have threatened the survival of various plants and animals, with winter temperatures remaining “freezing” for long stretches of time, added Tzedakis.

Sea surface temperatures in the region would have fallen below 6C, the paper found. The daily average sea surface temperature for the north Atlantic between 1979 and 2023 was 21C, according to the Copernicus Climate Change Service.

The paper also highlighted that there is a lack of archaeological evidence for the presence of early humans in Europe for the period between 900,000 and 1.1mn years ago, which could indicate that none inhabited the region for thousands of years following the cooling event. The oldest known human remains in Europe date from about 1.4mn years ago.

Although the earth’s climate has changed over time, man-made warming and the resulting weather extremes are occurring at a much faster pace.

Glacial-interglacial cycles historically occurred on “longer timescales” and were “quite different from changes [occurring] now”, said Tzedakis. “We can’t draw lessons from the past because it’s not directly comparable.”

FT : Arm’s IPO problems show just how much is at stake for SoftBank

Arm’s IPO problems show just how much is at stake for SoftBank
It is hard to overstate the difficulty faced by the tech investor in getting its company a premium valuation

It is hard to overstate the importance of chip design company Arm’s stock market debut for other tech companies hoping to list their shares. After a dearth of public offerings since the start of 2022, the IPO, which could come as soon as September, will be a barometer of the market’s revived interest in tech this year.

Yet it is also hard to overstate the difficulty that SoftBank, Arm’s owner, faces in getting the premium valuation it needs to help repair its own, battered image as a tech investor. It is taking Arm public at a time when the chip company’s core market has run out of growth, its business model is in transition and it is ensnared in a legal battle with one of its biggest customers.

The chip sector, like much of the tech world, is also in the throes of a valuation shift as investors try to identify which companies will benefit from the much-anticipated generative AI boom, and which will be left by the wayside. Any of these issues would complicate an IPO but taken together they make for a particularly challenging share sale.

No wonder SoftBank is trying to land a group of deep-pocketed anchor investors to put a floor under the offering price. It emerged this week that while Amazon has been in discussions about taking a stake in Arm, behind the scenes SoftBank has been courting a number of Arm customers that rely on its technology in their own chip designs.

Arm’s difficulties begin with the maturing of the smartphone market, where its designs for low-power processors are the standard. Apart from some successes in data centres and cars, SoftBank’s hopes of taking Arm’s technology to new markets have not panned out and its revenue fell 11 per cent in its most recent last quarter because of weak demand for smartphones — never a good look just before an IPO.

With its technology used to make CPUs — general purpose chips needed for the range of tasks undertaken by devices such as smartphones — Arm is also only on the fringes of the AI boom. The huge data processing demands of machine learning have brought a surge in sales of things like GPUs and networking chips that can accelerate the processing and transfer of data. Chips using Arm’s technology play only an auxiliary role in managing these functions.

SoftBank has already had a painful lesson in the cost of missing the hot trends in chip investing. Six years ago it bought $3bn worth of shares in Nvidia, the AI market leader. Had it held on rather than selling out for a short-term profit, that stake would now be worth $50bn — probably more than the whole of Arm will be worth when it goes public.

Arm’s business model is also at something of a crossroads. Arm made an average of 9 cents for each of the more than 30bn computing devices containing its technology that were shipped last year. To claim a bigger slice of the pie, it has floated the idea of charging device makers directly, rather than only looking to chipmakers for its licensing fees and royalties. As it prepares to go public, however, there is no indication that this plan will succeed.

At the same time, the company is under pressure as some of its own customers take on more of the work that goes into creating chips based on its designs. Along with selling blueprints of its technology, Arm sells computing “cores”, the basic building blocks of chips.

Apple, for one, has turned to making its own cores, meaning that it only needs to pay Arm for a basic, or “architectural”, licence. Qualcomm, one of Arm’s biggest customers, is moving in the same direction after buying a start-up called Nuvia which designs its own chips based on Arm technology.

According to some estimates, buying only an architectural licence could cut the amount that a customer pays in half. The threat is heightened by the fact that Arm is heavily reliant on a small number of big customers.

Arm’s willingness to take Qualcomm to court shows how much is at stake here. In what looks like a fight over licensing fees, the company filed a lawsuit arguing that Qualcomm’s Arm licence does not allow it to use the Nuvia technology, prompting a countersuit.

All of this adds to the significance of SoftBank’s attempt to bring in some of Arm’s big customers as investors. Besides helping to stabilise the price, such a move would act as powerful validation for Arm’s business at an uncertain time. But despite reports about the talks that have circulated for weeks, there is no sign yet that it can seal the deal.

>>> US Research Calls


Research Calls

  • Upgrades:
    • ADC Therapeutics (ADCT) upgraded to Neutral from Underweight at JP Morgan
    • Deciphera Pharmaceuticals (DCPH) upgraded to Buy from Hold at Stifel; tgt raised to $20
    • Essex Property (ESS) upgraded to Equal Weight from Underweight at Wells Fargo; tgt raised to $247
    • Global Payments (GPN) upgraded to Buy from Hold at Jefferies; tgt raised to $145
    • GoodRx (GDRX) upgraded to Buy from Neutral at DA Davidson; tgt $9.50
    • Mirati Therapeutics (MRTX) upgraded to Buy from Neutral at Citigroup; tgt lowered to $48
    • Gulfport Energy (GPOR) upgraded to Overweight from Sector Weight at KeyBanc Capital Markets; tgt $145
    • Kornit Digital (KRNT) upgraded to Overweight from Equal-Weight at Morgan Stanley; tgt $29
    • Roblox (RBLX) upgraded to Equal-Weight from Underweight at Morgan Stanley; tgt raised to $30
    • Southern (SO) upgraded to Equal-Weight from Underweight at Morgan Stanley; tgt raised to $69
  • Downgrades:
    • Atea Pharmaceuticals (AVIR) downgraded to Underweight from Neutral at JP Morgan
    • Bancolombia S.A. (CIB) downgraded to Underweight from Neutral at JP Morgan; tgt $30
    • Magnolia Oil & Gas (MGY) downgraded to Sector Weight from Overweight at KeyBanc Capital Markets
    • NeoGames (NGMS) downgraded to Hold from Buy at Deutsche Bank; tgt $29.50
    • Nuvei Corporation (NVEI) downgraded to Neutral from Buy at Goldman; tgt lowered to $22
    • OneSpan (OSPN) downgraded to Neutral from Buy at DA Davidson; tgt lowered to $12
    • Sylvamo (SLVM) downgraded to Sector Perform from Outperform at RBC Capital Mkts; tgt lowered to $44
    • TaskUs (TASK) downgraded to Neutral from Overweight at JP Morgan; tgt lowered to $12
    • TaskUs (TASK) downgraded to Sector Perform from Outperform at RBC Capital Mkts; tgt lowered to $16
    • Thoughtworks (TWKS) downgraded to Market Perform from Outperform at TD Cowen; tgt lowered to $6
    • Agiliti (AGTI) downgraded to Mkt Perform from Outperform at Raymond James
    • Certara (CERT) downgraded to Mkt Perform from Outperform at William Blair
    • Ceva (CEVA) downgraded to Neutral from Buy at ROTH MKM; tgt lowered to $20
    • Crown Castle (CCI) downgraded to Neutral from Buy at BofA Securities; tgt $115
    • Cryoport (CYRX) downgraded to Equal-Weight from Overweight at Stephens; tgt $15
    • Eagle Pharma (EGRX) downgraded to Underweight from Neutral at Piper Sandler; tgt lowered to $17
    • Enerflex (EFXT) downgraded to Market Perform from Outperform at BMO Capital Markets; tgt lowered to $11
    • Galera (GRTX) downgraded to Neutral from Overweight at Piper Sandler; tgt lowered to $0.50
    • Kulicke & Soffa (KLIC) downgraded to Hold from Buy at Craig Hallum; tgt $55
    • PENN Entertainment (PENN) downgraded to Hold from Buy at Craig Hallum; tgt lowered to $30
    • PENN Entertainment (PENN) downgraded to Hold from Buy at Truist; tgt lowered to $30
    • Petrobras (PBR) downgraded to Hold from Buy at HSBC Securities; tgt $13
    • Petrobras (PBR) downgraded to Neutral from Buy at Citigroup; tgt lowered to $14
    • SBA Comm (SBAC) downgraded to Neutral from Buy at BofA Securities; tgt $245
    • Stantec (STN) downgraded to Hold from Buy at Canaccord Genuity
    • Tricon Residential (TCN) downgraded to Sector Perform from Outperform at National Bank Financial
  • Others:
    • Cormedix (CRMD) initiated with an Outperform at RBC Capital Mkts; tgt $6
    • SLB (SLB) initiated with a Buy at William O'Neil
    • Zai Lab (ZLAB) initiated with an Overweight at Cantor Fitzgerald; tgt $70

>>> US Gapping down


Gapping down
In reaction to earnings/guidance:

  • ORGN -54.3%, ORGO -30.4% (also withdraws FY23 guidance), WWW -20.4%, PAR -15.9%, TASK -14.9%, CERT -14.6%, STKL -13.3%, PLUG -12.2%, MGNI -9.2%, PRPL -7.3%, DNA -5.7%, WEST -5.5%, MXCT -5.5%, MLTX -5%, CYRX -4.8%, DNUT -4.5%, DDS -4.5%, ILMN -4.4%, QNST -3.8%, PLBY -3.6%, HIMX -3.4%, HBI -3.4%, UHAL -3%, PLRX -3%, JBI -2.6%, INFN -2.4% (also files $100 mln convertible senior notes; files mixed shelf securities offering), NVO -2.2%, OEC -2.1%, HCCI -2.1%, CLNE -2%, SIX -2%, BRP -1.8%, G -1.7%

Other news:

  • INVZ -17.5% (prices offering of 26.0 mln ordinary shares at $2.50 per ordinary share)
  • TNGX -8.5% (announces agreement to sell approx. 15.5 mln shares in private placement at $5.15/share)
  • FLYW -6.4% (prices offering of 8.0 mln shares of common stock at $32.00 per share)
  • BXSL -5.3% (prices offering of 6.5 mln shares of common stock at $27.33 per share)
  • SWAV -3.8% (announces proposed private offering of $500 million of convertible senior notes due 2028)
  • TPR -3.4% (Tapestry (TPR) confirms definitive agreement to acquire Capri Holdings (CPRI) for $57.00 per share in cash for a total enterprise value of approximately $8.5 billion; expected to be immediately accretive)
  • ARMK -3.1% (prices secondary offering of 21262245 shares of its common stock by a selling stockholder at $39.75 per share)
  • BLNK -3.1% (received SEC subpoena relating to various matters)
  • ENVX -2.2% (files $1 bln mixed shelf securities offering)
  • MRUS -1.8% (prices offering of 6818182 common shares at $22.00 per share)
  • SPNT -1.8% (enters standstill agreement with Dan Loeb)

Analyst comments:

  • OSPN -10.1% (downgraded to Neutral from Buy at DA Davidson)
  • SBAC -2.9% (downgraded to Neutral from Buy at BofA Securities)
  • PENN -2.4% (downgraded to Hold from Buy at Craig Hallum; downgraded to Hold from Buy at Truist)
  • CCI -1.3% (downgraded to Neutral from Buy at BofA Securities)
  • AGTI -1% (downgraded to Mkt Perform from Outperform at Raymond James)
  • KLIC -1% (downgraded to Hold from Buy at Craig Hallum)
  • NVEI -0.8% (downgraded to Neutral from Buy at Goldman)